Instead of just leaving bequests to loved ones after you’re gone, consider making gifts while you’re still alive. Giving gifts while you’re still living can help reduce the size of your estate and minimize potential estate taxes. And, with careful planning, you can also limit federal gift taxes.

Tax-free Gifts

Each year, you can give away up to $13,000 in cash or other assets per recipient to as many individuals as you want, gift tax free. If you’re married, you and your spouse can jointly give away $26,000 per recipient (a “split gift”). If you have several children to consider, as well as their spouses, and grandchildren, those annual gifts can really add up and may significantly reduce the size of your estate.

Another way to avoid gift taxes is to pay medical expenses or school tuition for a loved one. There are no limits on the amount of these expenses you can pay, as long as you give the money directly to the medical provider or the educational institutions where the expenses were incurred.

Another possibility might be to make tax-free contributions to the 529 college savings plan of a beneficiary. In one year, you may invest as much as $65,000 ($130,000 if you split the gift with your spouse) in a 529 plan. However, that $65,000 will be treated as if it were a series of $13,000 gifts made over five years. As a result, you won’t be able to make any other tax-free gifts to that person during that five-year period.

Lifetime Gift-tax Credit

A lifetime gift-tax credit allows you to give away as much as a total of $1 million to family, friends, and other beneficiaries over your lifetime without owing any federal gift tax. If you are married, you and your spouse each are entitled to a separate credit. Use any or all of the credit to offset taxes on gifts, and the amount you have used will not be available to offset taxes on your estate.

Gifts made under the $13,000 tax-free-gift rule will not use up any of your lifetime gift-tax credit. However, any gifts you make over the $13,000 limit per individual, per year, will reduce your lifetime available credit. But you generally won’t have to pay any federal gift taxes unless your total gifts over the $13,000 limit add up to over $1 million.

Giving after You’re Gone

Under current law, you can leave bequests of up to $3.5 million free of federal estate taxes in 2009. If you’re married, you and your spouse can each leave up to $7 million estate tax free. In 2010, the estate tax is scheduled to be repealed, only to return a year later, depending on Congressional action.

Because gifts that are sheltered by your lifetime gift-tax credit will reduce the amount you can leave tax free to your heirs, it’s important to carefully consider your gift- and estate-tax strategies. We can help you design a plan to minimize your tax exposure.

MFN-1009-D0D6

Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.

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